Nov. 10, 2000 -
The gridlocked presidential election has captivated investors, but the real difficulties could start once a new administration steps in.

During the first two years of the past 11 administrations, consumer confidence has generally weakened, only to rebound in years three Nash and four, Richard Nash, chief market strategist at Key Asset Management in Cleveland, told Key clients in Denver on Thursday. He quoted market research firm Crandall, Pierce & Co., which also reported the economy and consumer spending tend to grow slower early in a new president's term.

"Regardless of the outcome, the new president is going to inherit a much more difficult environment," agreed Christine DeRose, vice president at Dain Rauscher in Denver.

Once investors get past the election turmoil, earnings and the weakness of the euro could dominate the markets, Nash said.

Nash compared the current turmoil in the markets to similar situ ations in 1994 and 1995. In 1994, companies reported strong earnings, but a series of rate hikes from the Federal Reserve cut into stock returns. The following year, earnings weakened, but declining interest rates triggered a run-up in stock prices.

"Any time you get in a tug of war between earnings and interest rates, interest rates are going to win," Nash said.

Earnings rose an average 20 percent in the first half of this year, beating estimates of a 15 percent increase. Nash projected they will continue to grow about 8 percent or 9 percent next year.

The slower earnings growth reflects a slowing economy. A series of six interest rate hikes from the Federal Reserve over the past 18 months has made capital more expensive for consumers and busi nesses alike. Higher oil prices have cut into disposable income. The fall in the stock prices has also left some investors less wealthy.

As a result, consumers appear to be pulling back on spending, which could spell problems for retailers this holiday season.

"Oil prices will act as a tax on the American consumer," Nash said, noting that discount retailer Wal-Mart has reported slower traffic at its stores. The consumers who come in are spending the same amount they did in the past, but fewer shoppers are making it to the store, he said.

The stock price of retailer Best Buy Inc. fell 38.8 percent after the company announced weaker than expected earnings. Kmart Corp., Land's End and Gap Inc. also fell.

The silver lining in an economic slowdown is that the Federal Re serve would be likely to lower interest rates next year.

Nash said one of the biggest threats on the horizon remains the country's trade deficit. The United States continues to import significantly more than it exports - an imbalance that the weakness in the euro has exacerbated.

Europe's central banks are raising rates to head off inflation and slow their economies. But the weak European currency makes U.S. goods more expensive and cooling demand makes consumers less willing to buy.

Once the uncertainty over the elections is removed, investors will need to look at earnings and interest rates, Nash said. And those could prove tougher to predict than even the Bush and Gore race.

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